Should You Use Gusto to Set an S-Corp Salary?

Every S-corp owner who works in the business has to pay themselves a reasonable salary, and in practice it's often the owner's CPA or tax preparer who sets that number or signs off on it. Salary goes through payroll and carries Social Security and Medicare taxes, 15.3% in total on most salaries, while profit the owner takes out as distributions doesn't. That gap is where most of an S-corp's tax savings come from. It's also why the IRS requires the salary to be reasonable, meaning roughly what the business would have to pay someone else to do the owner's work.

If the IRS examines the return, the owner may be asked to show that the salary is reasonable, and the IRS doesn't give a formula for doing so. Its fact sheet on S-corp wages lists factors courts have weighed, including the owner's training and experience, duties, time and effort devoted to the business, and what comparable businesses pay for similar services. In 2014 the IRS also wrote a reference for its own valuation staff, the Reasonable Compensation Job Aid for IRS Valuation Professionals. It isn't an official IRS position, but it asks whether the company keeps "contemporaneous records documenting the process for compensation determinations." It also says, "Companies have the burden of showing that compensation is reasonable."

Most payroll providers leave the number to the business, but Gusto offers a Reasonable Salary Calculator, both to owners of one-employee S-corps when they set up payroll and, for free, to accountants in Gusto Pro. While Gusto's calculator might be a good place to start, it's missing some of the important things an owner or accountant would want in a tool for setting reasonable compensation. For most owners, Gusto's estimate on its own isn't enough. The salary should be priced for the hours the owner actually works, and backed by a report that shows the method and where every wage figure came from. Everything below about Gusto comes from Gusto's own public pages, as of October 2026.

How does Gusto's salary calculator work?

Owners see the calculator while setting up payroll, if the business is an S-corp with only one employee. Gusto's help article for owners has the owner confirm the business's location and industry and enter its net revenue. Then the owner picks a primary role and any other tasks, sets an expertise level for each, and splits the week among them. Gusto turns those answers into a salary estimate from Bureau of Labor Statistics (BLS) wage data, and the owner can carry it into payroll and change it there.

Accountants get the same calculator on the Advisory tab in Gusto Pro, as part of Gusto's Solo S-Corp Advisory Tools, and can run it before the client is even on Gusto. The accountant enters the client's role, location, expertise and any other tasks, and Gusto returns an estimate based on BLS wages for comparable roles in the client's area. Gusto tells accountants to treat the estimate as a starting point, and says the resulting figure "reflects your professional judgment, and you remain responsible for it."

Gusto describes the estimate to accountants as cost-based. In the cost approach, each part of the owner's work is priced at what it would cost to hire someone to do it, weighted by the time it takes, and the parts are added up. WageProof reports can start from the same approach, and our article on the cost approach walks through the method.

What if the owner doesn't work full time?

Gusto's calculator asks how the owner's week divides among roles. None of Gusto's published pages list a question about how long the week is, so an owner who works 20 hours a week and one who works 40 can give the same answers. Gusto's own guide to S-corp salaries recognizes that hours matter, saying an owner who works part time "may reasonably receive lower compensation than a full time owner."

The cost approach is built on the hours the owner actually works. If the owner works 20 hours a week, the business could replace that work with a 20-hour-a-week hire, and the salary should reflect that hire, not a full-time one. BLS's annual wage figures assume a full-time year of 2,080 hours, so a salary taken straight from them prices a full-time job.

For a part-time owner, the difference adds up. Say an owner's mix of work would cost $80,000 a year to replace with a full-time hire, and the owner works half that schedule. The replacement cost is about $40,000. A salary of $80,000 puts another $40,000 through payroll, along with $6,120 a year in Social Security and Medicare taxes on it.

The hours need support, too. In Glass Blocks Unlimited v. Commissioner (2013), the owner testified that he worked only 20 hours a week. He had told the IRS examiner he worked over 40, and the company's website listed weekday hours of 8 to 5. With nothing else to back up the 20 hours, the Tax Court gave that testimony "little weight." A calendar, timesheets or billing records that show the hours belong in the file.

What should the file show if the IRS asks?

If the IRS questions the salary, the owner, and usually the accountant who helped set it, will need to show how the number was reached. An examiner would want to see which jobs the owner's work was priced as and in which area, which year's wage data was used, at what wage level, and for how many hours.

In David E. Watson, P.C. v. United States (2012), Mr. Watson, a CPA, said his salary came from his partners agreeing on what the firm's cash flow could support. The appeals court ruled against him and noted, "There were no documents reflecting these salary discussions."

Gusto's developer documentation says accepting an estimate saves a permanent, timestamped record, and its Solo plan page lists audit-ready salary records among its features. Its public pages don't show what that record looks like, or whether it names the data year, the wage level or the BLS table behind the figure. Gusto's own guide tells owners to "maintain documentation showing how you determined your salary." A WageProof report is meant to be that documentation, in a form an owner or accountant can hand to an examiner.

How is WageProof different?

WageProof doesn't run payroll, and it isn't another version of Gusto's calculator. It works out what it would cost to replace the owner's actual work, for the hours they actually work and the tax year in question, and puts every step in a report:

• Hours. The owner's hours for the year go in, from 520 to 2,080, and the report prices that much work.
• Tax year. The report uses BLS's wage release for the year chosen, which helps with year-end work and with catching up a past year. If BLS hasn't published that year's wages yet, the report carries the latest ones forward with BLS's Employment Cost Index and prints the adjustment. Gusto's developer documentation says its calculations always use the most current data available.
• Experience. Both tools ask for an experience level for each role. WageProof's five levels are defined by years in the work, from under one to 15 or more, and its methodology publishes the BLS percentile each one uses, from the 10th to the 90th. (The 50th percentile is the median wage for that job.) Gusto's public pages don't say which wage level its levels use.
• The report. A dated PDF that lists, for each duty, the BLS occupation and code, the wage area, the data year, the percentile, the hours and the time split. It names the BLS table each wage comes from and prints the math for any adjustment. The sample report shows a full example.
• For accounting firms. Firms run reports for their clients, can send a client a questionnaire link to fill in their own work details and hours, and share clients and reports across the firm's seats. On Professional and Firm plans, reports carry the firm's logo and colors. Accountants can also price a client with the market or income approach when the cost approach doesn't fit.

Can an owner or accountant use both?

Yes, but most owners shouldn't stop at Gusto's number. Gusto's estimate is a useful first look, and Gusto can keep running payroll either way. The salary itself should be set with a report that prices the owner's actual hours for the right tax year and shows where every figure came from, then paid through Gusto. More on how firms use WageProof is on the page for CPAs.

WageProof is not affiliated with or endorsed by Gusto. Gusto is a trademark of its owner.